Boards and finance

Arts board members clearly feel a strong desire for information and training on non-profit financial analysis and oversight. This was one of the most frequently mentioned requests (after, not surprisingly, fundraising) for future sessions following my recent Art of Good Governance sessions with the Toronto Arts Foundation.

The idea of having “fiduciary responsibility” for an arts organization is definitely a bit anxiety-producing in our world of government funding uncertainties, fundraising shortfalls (see above), intermittent cash flow crises, and unpredictable box office returns. Keeping a careful watch on an organization’s financial health and future viability, while assessing and managing risk and planning for success in a rapidly changing environment, requires a cool head and a keen eye. The Toronto Arts Foundation will no doubt be including financial learning opportunities for board members in their Get on Board series, but in the meantime I’ve written about the wonderful financial resources on the Young Associates website. It contains a wealth of tips, links and advice on budgeting, accounting, financial management and reporting, tax and legal requirements for arts organizations, and much more.

For a review of the fundamental differences between non-profit and for-profit financial assumptions, this piece by Clara Miller is thorough and enlightening. “Not only are nonprofit rules that govern money—and therefore business dynamics—different from those in the for-profit sector, they are largely unknown, even among nonprofits and their funders. Or at the very least, they remain unacknowledged and unspoken.” Like what? Oh, for example, that price covers cost and eventually produces profits, or else the business folds. Or that cash is liquid.

She also makes a strong argument for investment in infrastructure for growth – something that consistently shifts to the bottom of the list for many non-profit arts organizations, to the detriment of the sector.

Many of us harbour the mistaken belief that general operating funds and administrative expenses should be kept low and squeezed tight in order to direct all possible funds to expanding programming. This seems to be an increasingly top of mind consideration for donors, but what’s been called the “Non-Profit Starvation Cycle” is counter-productive and limits our ability to truly achieve our missions. “It is unreasonable to expect any business to operate and grow with out-of-date technology, inadequate office space and untrained, underpaid staff. Yet, when donors ask the question about overhead, that is exactly the reality that continues to permeate charitable systems.”

Vu Le of Nonprofit with Balls takes this argument a step further, making a heart-felt pitch for unrestricted funding: “Imagine… what it would be like if a bakery ran with the same funding restrictions as a nonprofit: ‘I need a cake for some gluten-free veterans. I can pay you only 20% of the cost of the cake, and you can only spend my money on eggs, but not butter, and certainly not for the electricity; you have to find someone else to pay for the oven’s electricity. Also, you need to get an accounting firm to figure out where you’re spending my money, but you can’t use my money to pay for that service…’ The amount of time and energy we nonprofits spend trying to figure out which funder is paying for what part of which program under which phase of the moon could be better spent actually helping people, improving outcomes, expanding programs, etc…”

A lot of non-profit managers and board treasurers reading this will be quietly cheering.

Here’s Imagine Canada’s persuasive input into changing the overhead conversation: (Sadly, we have a long way to go. A 2013 Muttart Foundation survey revealed that nearly three-quarters of Canadians believe that charities spend too much on salaries and administration. Another recent survey found that 51% of Canadians believe that between 81% and 99% of money should go ‘to the cause’ with 32% of those surveyed actually believing the number should be 100%.)

And here’s a sobering case study on what can happen when the need to build financial reserves is ignored.